Last month, the California Lawyers Association Nonprofit Organizations Committee hosted Audrey Rowe from the State of California Franchise Tax Board (FTB) to discuss updates to the FTB’s system and processes affecting tax-exempt organizations. This post captures some of the highlights.

Beginning in 2024 the FTB began a major systems update to myFTB, a website that gives individuals, business representatives, and tax professionals online access to tax account information and online services. These updates have affected both the internal and external processes, including:

• In October 2024, a pilot program was rolled out to certain users to test functionality and features.  The FTB anticipates these online services will be ready to be rolled out to all users by January 2026. Ms. Rowe acknowledged that FTB staff is still learning the system. The FTB encourages users of the site to send feedback so it can incorporate user experiences and enhance the site. Exemption Application Form 3500 and 3500A that come from the FTB may look different from past years.  However, everything should be accessible to users  in myFTB Online Submissions.
• During the testing phase, online submittals (e.g., Form 3500, 3500A) can only be made from representatives that have power of attorney (POA) and can access their clients’ myFTB accounts. Other representatives without POA are expected to be able to make certain online submissions starting in 2026.
• Regarding corporation numbers. The Secretary of State changed their numbers for newly formed corporations and entities. Newly formed entities/registrations have 11 digits. The FTB’s changes to its online systems to accommodate the new numbering system are still in process (Form 199N compatibility is still pending). However, the numbers may not be compatible with older versions of Forms 3500/3500A. Make sure the latest Forms are being used.

Application Processing Headlines

• The FTB is fully staffed but the system implementation and training has led to staff downtime that has resulted in a large backlog of applications.
  • Form 3500
    • Time to assignment: 6-7 months
    • Backend processing: additional 3 months
  • Form 3500A
    • Time to assignment: 10-12 months

Revocation for Failure to File Information Returns

• If less than one year has elapsed since revocation – reach out directly to FTB and they may offer a courtesy reinstatement without need for filing a new application

Duplicates and Changes

• Conversions
  • An organization that started as an unincorporated association and now wants to incorporate as a charitable nonprofit corporation – must reapply for exemption post-incorporation.
  • An organization that started as an LLC and converted to a nonprofit corporation (after first converting to a stock corporation) – (1) if the LLC had prior exemption, even if it was revoked, it can qualify for an exemption back to its original exemption date; (2) if the LLC had never been exempt, exempt status would only go back to when the nonprofit corporation was formed.
  • A California nonprofit corporation that wants to change to a nonprofit corporation organized under the laws of another state  – Post-change, the leadership must file a final return for the California corporation. The foreign corporation (outside-of-California) can then register in the state the corporation has moved to. If the board wants to continue operating as a nonprofit in Californiia, it will need to apply for state tax exempt status for the new entity started in the  other state.
• Name changes
  • Old systems communicated seamlessly with other agencies including the Attorney General and the Secretary of State; in the new system, the syncing still needs work.
  • Because name change data feeds are not syncing between the Secretary of State and FTB, an organization’s records with the FTB may be in the old name.  
  • Representatives/organizations should reach out directly to FTB to update the name in the FTB system.
• Copies of determination letters
  • Initial determinations may take 9 months (currently)
  • But if your organization is already exempt, contact the FTB for faster service

Dissolutions –

• Sync problems
  • The systems of different agencies are not communicating well. Contact the FTB if you are experiencing issues, particularly if you are dissolving under program 3502 (pre-dissolution tax abatement).
  • If an organization was required to resolve issues with another agency before getting the FTB abatement, and successfully resolves such issues, contact the FTB to let them know this since the FTB may not otherwise be notified of such resolutions.
• FTB administrative dissolutions
  • FTB previously administratively dissolved organizations that have been suspended for four years, but the process has been suspended since the pandemic era and will remain suspended until communication syncs between the Secretary of State and FTB are fixed.
• Volunteer nonprofit administrative dissolutions
  • See Voluntary administrative dissolution/cancelation
  • FTB Form 3502; Instructions for Form FTB 3502
  • FTB will perform its due diligence to help ensure compliance
  • If the organization is a public benefit or religious corporation, the FTB will send the form 3502 to the AG’s office to review and see if enough information is there to issue a dissolution waiver
  • 20-23% of the time there is not enough info for the AG office to issue a waiver. Some common issues the AG’s office has found that lead to rejection include:
    • Insufficient detail about the organization’s assets;
    • Failure to specify the recipient nonprofit of remaining assets;
    • Recipient nonprofit’s legal status (not in good standing)
  • The AG dissolution waiver is good for one year, but the FTB may be able to arrange for an extension if the Form 3502 process delays the dissolution (dissolution must also generally be completed within one year)
  • Common issues with the FTB Form 3502:
    • Not prepared correctly
    • Organization is not qualified (e.g., operated but no prior IRS or FTB exemption)
    • Undistributed assets (especially real estate)
    • Approved but not dissolving in time
    • Dissolved prior to filing Form 3502
    • Dissolving in CA but still operating in another state

Communications

• Emails preferred and are capable of being confirmed
  • Electronic attachments (e.g., pdf and zip files) are preferable to cloud-based links or USB drives (IT security issues)
• Regular mail (USPS) is preferred to express/private delivery because the latter requires need for someone in office to sign for receipt (may result in 2-4 weeks delay)
• Phone calls may be appropriate for urgent matters or in response to a call from the FTB (however, the FTB generally will not initiate contact by call)
  • Okay to request an email response back from the FTB

Coming Soon

• Online submission of exemption applications
• Testing in progress
• Currently, representatives need a Tax Pro Account and Power of Attorney; in 2026, representatives without a Power of Attorney will be able to submit the applications
• Others will need to create a basic account at myFTB